Note: This post first ran in December of 2009.
By Dan Olmsted and Mark Blaxill
Paul Offit, vaccine entrepreneur and public health spokesperson, has earned approximately $10 million in income from Rotateq® royalties through 2009 and stands to earn a total of between $13-35 million over the life of his rotavirus vaccine patents, according to a new analysis by Age of Autism. Our analysis also shows that Offit’s future royalty income is strongly tied to Rotateq®’s future sales in domestic and international markets, giving him a strong financial stake in both the specific success of the rotavirus vaccine category and the global reputation of vaccines in general.
This new analysis by Age of Autism updates an earlier report in which we detailed Offit’s financial conflicts. Our original report, derived through independent reporting on which Offit and his employer would not comment, was based on information that we have since learned did not reflect recent changes in practices on sharing patent revenues with inventors and a private agreement on revenue sharing between Offit and his co-inventors. Our new estimate of Offit's total profit of $13-35 million through 2019, overlaps the range of our original estimate of $29-55 million. Both those estimates exceed Offit's recent -- and apparently partial -- disclosure that he made "about 6 million.”
New information from Offit allows more detailed analysis
We previously reported (HERE) that Offit, co-inventor of Merck’s Rotateq® vaccine, sat on the regulatory body that held the authority to create the market for the rotavirus vaccine category, participated in committee deliberations that bore directly on the commercial value of that category and voted in favor of measures that expanded the resulting market; all this while a vaccine formulation protected by his patented invention in the same category was proceeding through clinical trials. We estimated the personal profit Offit made when his own rotavirus vaccine was subsequently approved, marketed and a portion of his royalties securitized in a transaction worth $182 million. We asked Offit and his employer, the Children’s Hospital of Philadelphia (CHOP) to comment on our estimates but CHOP declined comment and Offit never responded to our inquiry.Recently, however, Offit has revealed to others additional information on his personal stake in Merck’s Rotateq® vaccine (for Offit’s public emails on this issue, see HERE). These new disclosures enable us to refine our earlier estimates and present a sharper picture of Offit’s financial interest in the success of the invention his sponsors at CHOP and the Wistar Institute licensed to Merck. Our original analysis estimated Offit’s profits from Rotateq® in a range of $29-55 million, all of which we suggested flowed to him following a single lump sum payment to CHOP from a financial firm called Royalty Pharma. Offit now claims that the one-time payment from CHOP was less than our estimate, revealing to Amy Wallace of Wired Magazine that CHOP paid him “several million dollars” and to others that he received “about $6 million.”
“It was a ridiculous amont [sic] of money…but it is also a far cry from what has been claimed.”
Offit’s recent revelations do little to change our conclusion, that he was “voting himself rich” while sitting on a government vaccine standards body. But they do suggest that our assumptions regarding the way in which cash flowed from Merck’s Rotateq® account to his own pocket were incomplete. And while we have no reason to question Offit’s disclosures regarding his share of CHOP’s securitization deal with Royalty Pharma (or his claim that this lump sum payment was less than we estimated), we also describe here how Offit’s disclosure of this lower payment does not constitute full disclosure of his financial interest in Rotateq®. Instead, Offit’s recent statements have continued his pattern of partial disclosure of his financial relationship with Merck (see HERE for an earlier report from CBS News on this pattern of partial disclosure), failing to mention at least one other lump-sum payment and downplaying the full extent of his ongoing financial relationship with Merck’s vaccine business.
Based on two crucial new disclosures from Offit, we estimate in a revised and more detailed analysis that Offit has received and will continue to receive multiple payments based on Rotateq® licensing revenue, that he may already have earned $10 million from Rotateq® and that he stands to earn between $13-35 million over the lifetime of Rotateq’s key patents (based on different assumptions regarding the product’s future worldwide sales forecasts). In the first of these two disclosures, Offit has revealed that he had an agreement to share the royalty payments with his co-inventors, Stanley Plotkin and Fred Clark; this agreement reduces our estimate of his payout from the Royalty Pharma deal, but since CHOP owned only half of the rights to the patents, we are now able to estimate his share of Wistar’s inventor payments, a source of wealth that we had not previously assigned to him. In his second disclosure (one that reinforces the finding that he has shared in distributions from the Wistar Institute’s royalty revenue), Offit has revealed that he is receiving a “continuing royalty each year” for Rotateq®, a royalty stream that could only come from Wistar. Taken together, these two disclosures provide a clearer picture of Offit’s path to personal wealth while also demonstrating that his ongoing royalty stream gives Offit a large and continuing financial stake in the success of Merck’s Rotateq® business.
If Offit had chosen to reap the benefits of his invention privately, there would be little public interest in publication of his stake in Merck’s Rotateq® revenues: inventors have every right to profit from their inventions and companies have every right to fund the commercialization of innovative new products. But Offit’s ambitions are larger than Rotateq®; he has thrust himself into the spotlight as both a vaccine safety authority and an autism expert, spokesman roles that have little to do with his work on Rotateq®. In these dual roles, he has worked aggressively to diminish public concerns over rising autism rates while deriding those who express concerns over vaccine safety. In effect, he has moved beyond his original rotavirus expertise and taken on a new career as a booster of the American medical industry, writing books on autism and vaccines (with another on what he calls the history of the “anti-vaccine” movement on the way), participating in highly publicized conflicts with several of the world’s leading autism charities and eagerly providing talking points for numerous media articles and books. Because he has approached this new career donning the mantle of a disinterested expert scientist, we contend that Offit’s personal financial connection to the world’s leading vaccine manufacturer is a matter of legitimate public concern, since Offit’s efforts serve both his own and Merck’s ongoing financial interests. Beyond promoting Rotateq®’s worldwide growth, Offit’s advocacy benefits Merck’s ongoing vaccine business, which has confronted controversial issues such as withdrawals, adverse reactions and regressive autism in products like ProQuad®, Gardasil®, and MMR II®.
Our reporting on this issue is also a matter of public interest, since our estimates of Offit’s Rotateq® riches have attracted widespread attention. Offit has commented with bitterness on our coverage of his Rotateq® payments, complaining that “It hurts to watch people slander me the way they do.” Most notably, we have received hostile (and in one case threatening) messages from readers who take issue with our estimates. Although these threats have concerned us, they have also been a useful source of new information, the full implications of which our critics had clearly not grasped. After a thorough new investigation, we decided, in an unusual exercise in financial forensics, to undertake a reanalysis of the Offit’s Rotateq® related finances.
Our financial forensics analysis has led us to investigate two different types of payments
1. Lump sum payments distributed to Offit and his fellow inventors by both CHOP and the Wistar Institute following transactions in which each institution sold a portion of its royalty streams to a financial investor. We have estimated the size of the distributions in these two deals based on Offit’s disclosures, public descriptions of the terms of each deal and some basic financial analysis.
2. Ongoing distributions to Offit and his fellow inventors based on direct payments from Merck to either CHOP or the Wistar Institute. These distributions include both past payments that we have estimated based on reported Rotateq® revenues and future payments for which we have forecasted ranges of annual payments based on different forecasts of Merck’s future worldwide Rotateq® revenues.
After developing estimates of the size of each lump sum or direct royalty payment, we then add up all the payments to obtain a complete estimate of the wealth that has flowed and will continue flow to Offit from his financial connections to Merck.
Offit’s lump sum payments
1) The CHOP securitization deal with Royalty Pharma Trust. On April 24, 2008, The Children’s Hospital Foundation (CHF, CHOP’s parent company) and Royalty Pharma announced that CHF had “sold its worldwide royalty interest in respect of sales of RotaTeq® from and after October 1, 2007, to Royalty Pharma for $182 million in cash.” This large and relatively simple transaction represented a large financial windfall for CHOP. Two months later, Moody’s Global Credit Research reported that “CHOP's strong investment position continues to be a major credit strength”, in large part because “in April CHOP received $153 million in proceeds from the monetization of royalty rights related to the development of a vaccine for rotavirus.” Although both announcements reported on the same transaction, we have been unable to fully explain the $29 million difference between Royalty Pharma’s reported payment ($182 million) for CHOP’s royalty interest and CHOP’s reported proceeds ($153 million) from the monetization of its royalty rights.
In calculating Offit’s stake in this transaction for our earlier report, the simplest plausible scenario involved two assumptions: 1) that CHOP’s sole inventor was Paul Offit and 2) that the difference between Royalty Pharma’s payments and CHOP’s receipts represented CHOP’s distribution of royalties to the vaccine’s inventor(s). At the time, the information we had suggested this was a likely scenario. With respect to Offit’s standing as CHOP’s sole inventor, we reviewed the file history for the Rotateq® patents and obtained copies of the “assignment agreements” for both CHOP and Wistar (in most American commercial research enterprises, inventors assign ownership rights for their inventive work to their employers). In the case of the Rotateq® patents, these file histories documented two separate assignment agreements: in one, Paul Offit signed the form ceding his inventor rights to CHOP; in the other, Fred Clark and Stanley Plotkin assigned their inventor rights over to Wistar (for copies of the actual assignment agreements see HERE).
Since neither CHOP nor Offit were willing at the time to disclose the payments he received for Rotateq®, in calculating the dollar amount of royalties distributed to the inventor(s) we based our analysis on two sources: CHOP’s current patent royalty policy and the patent royalty policy of a sample of comparable institutions. We learned that CHOP’s current policy provides inventors with a distribution share equal to 30% of royalties; we also learned that in a sample of comparable institutions (including university-affiliated children’s hospitals) reported inventor distributions ranged from 15-35%. Finally, we noted that the $29 million difference between the announced Royalty Pharma payment of $182 million and the reported proceeds of $153 million to CHF was 15.9% of the Royalty Pharma payment.
In the absence of any response from CHOP or Offit, we decided to report a range of possible payments and to estimate the low end of the range using an inventor(s) share of 15.9%: in part because we preferred to emphasize the most conservative estimate, and in part because the difference in reported payments to and receipts by CHOP of $29 million came to 15.9% of $182 million. Based on the evidence from the assignment documents, we assumed that the entirety of this inventor payment went to Offit.
According to Offit’s recent disclosure, it appears now that this scenario was not what actually occurred. In fact, the full inventor team—including Offit, Clark and Plotkin—shared in the CHOP payment. Based on the current CHOP policy, it is clear that such private arrangements between inventors are anticipated. “If there is only one such Inventor, Author, or other creator, the total Inventor Share is payable to that person” reads the “Patent and Intellectual Property Policy” from CHOP’s Administrative Policy Manual. But “where there is more than one such Inventor, Author, or other creator, and all such persons unanimously agree in writing how the Net Income should be distributed among them … then the Net Income will distributed in accordance with such agreement.” According to Offit, he, Clark and Plotkin reached a private agreement to share the inventor proceeds, which resulted in a three way split of the inventor distribution.
But if Offit shared the Royalty Pharma proceeds with Plotkin and Clark, then Offit would also stand to receive a share of any Rotateq® related payments made to Wistar, payments we did not attribute to him previously and that he has not disclosed. In contrast to CHOP, Wistar’s approach to monetizing its patent royalties combined smaller lump-sum payments with a larger ongoing relationship with Merck, a financial structure we will analyze in greater depth below.
Offit has also disclosed that the actual inventor share of the Royalty Pharma transaction was 10%, a number well below CHOP’s current 30% policy, the 15-35% range from comparable institutions and our 15.9% estimate. His claim of a 10% inventor distribution for Rotateq® is supported by a document we received from a critic of our analysis: a January 2007 newsletter from CHOP call “Bench to Bedside” (see HERE). In this newsletter, CHOP announced a change to their patent and intellectual property policy that raised the inventor distribution from a prior share of 10% on all royalties above $5 million (based on a sliding scale that started with a 50% share) to the current share of 30% on all royalties.
Offit has now publicly disclosed both of these terms (a disclosure that Age of Autism Contributing Editor Jake Crosby confirmed in direct correspondence with Offit). So instead of our original range of $29-55 million and our base case of $29 million, we now estimate that Offit received a $6 million lump sum payment from CHF based on the Royalty Pharma deal ($6.2 million to be precise).
But even this revised lump sum estimate likely understates Offit’s total return from the CHOP royalty streams. According to the announced payment terms, Royalty Pharma only purchased the rights to CHOP’s royalty stream “from and after October 1, 2007.” Based on its quarterly financial statements, Merck reported Rotateq ® sales of $537 million before that date. If CHOP retained the royalty rights to Merck revenues before that date, then Offit could have received royalty payments directly from CHOP based on Merck’s early Rotateq® revenues in addition to the lump sum payment he received based on the Royalty Pharma transaction (see our estimate of this additional direct payment below).
It’s also worth noting that CHOP’s current “patent and intellectual property policy” sets the terms not just for direct inventor payments but also includes a provision for direct royalty distribution to the inventor’s laboratory and department (25% of royalties up to $850K) as well as a distribution to hospital research (40%). We have no evidence that this provision was in place during the Rotateq® deal. But since the Royalty Pharma deal was closed just 15 months after the new CHOP policy was announced, it seems likely that Offit’s new interest in autism research has received a boost from CHOP’s Rotateq® proceeds (following Offit’s newfound interest in autism research, we noted with interest that a substantial portion of the new autism genetics program at CHOP’s Center for Applied Genomics was self-funded: see HERE).
So instead of our earlier estimate of a single $29 million payment to Offit from the Royalty Pharma transaction, it appears that single lump-sum transaction “only” netted Offit $6.2 million. In addition, however, our emphasis on a single transaction omitted numerous other payments that Offit has received. One of these was another seven figure lump sum payment from Wistar.
CHOP declined to comment for this article.
2) The Wistar Institute’s securitization deal with Paul Capital. Offit revealed to reporter Amy Wallace that he receives ongoing royalties on Rotateq®. According to Wallace’s report in Wired, Offit “continues to collect a royalty each year. It’s a fluke, he says — an unexpected outcome. ‘I’m not embarrassed about it,’ he says. ‘It was the product of a lot of work, although it wasn’t why I did the work, nor was it, frankly, the reward for the work.’”
Offit’s seemingly modest disclosure to Wallace opens up an entirely new field of financial forensics. For, like CHOP’s transaction with Royalty Pharma, Wistar was also active in negotiating securitization deals for its patent royalty streams. On December 15, 2005, “The Wistar Institute…announced that it has sold a portion of its anticipated worldwide royalty revenues from Rotateq® to an affiliate of the Paul Royalty Fund for $45 million” (emphasis added).
Unlike CHOP, which elected to minimize its risk by trading all of its future royalty payments for a single lump-sum payment, Wistar took a less cautious approach. Instead of selling its entire royalty stream to Paul Capital (the Paul Royalty Fund is run by Paul Capital), Wistar only sold the rights to the first $300 million in worldwide Rotateq® revenues. Beyond that threshold level of sales, Wistar was willing to gamble on Merck’s success in marketing Rotateq® to the world. According to the deal’s announced terms, “Wistar is expected to retain all worldwide royalties on Rotateq® sales in excess of approximately $300 million annually.” In return for giving up its rights to the first $300 million in Rotateq revenues, Wistar received a lump-sum payment of $45 million from Paul Capital, a large payment, to be sure, but one that was substantially smaller than Royalty Pharma’s lump sum payment to CHOP.
Wistar’s immediate receipt of $45 million was subject to the same inventor distribution requirements as the CHOP transaction. So just as Offit received a share of the CHOP inventor distribution, the Wistar deal created an occasion for a second lump-sum payment. According to the “Guidelines for Wistar inventors” (see HERE), Wistar’s current revenue sharing policy sets the inventor share of royalty distributions at 15%. Splitting those proceeds three ways means that Offit would have received 5% of the Paul Capital proceeds, or $2.25 million (By way of comparison, if the operative Wistar royalty rate was 10% instead, the same level as CHOP, Offit’s share would have been $1.5 million).
In his recent disclosures regarding his CHOP payment of $6 million, Offit has consistently neglected to mention that he received another seven-figure payment from Wistar a few months before. Adding these payments together gives Offit a total of $8.4 million from lump sum payments alone.
As we noted above, a cursory comparison of the Royalty Pharma and Paul Capital transactions raises the obvious question: If both CHOP and Wistar shared patent rights equally between them, why was the Paul Capital payment of $45 million to Wistar so much lower than the Royalty Pharma payment of $182 million to CHOP? The answer, of course, is that the terms of each deal were different. In the case of CHOP’s royalty stream, Royalty Pharma purchased the entire royalty stream from CHOP; by contrast, Paul Capital purchased a much less extensive right to a more predictable revenue stream, the royalty rights on the first $300 million of Merck Rotateq® revenues. In a sense, Paul Capital paid for the rights to a security that resembled a bond: a fixed “coupon” based on a relatively certain royalty stream that would last the life of the patents. In the case of Rotateq®, the relevant period of patent protection is just under 13 years: in 2006, CHOP and Wistar applied for a 4.8 year patent term extension on the key Rotateq® patent and their request was granted earlier this year. Patent protection for Rotateq® now expires on February 19, 2019.
From the perspective of Offit’s finances, the difference between CHOP’s $182 million and Wistar’s $45 million means that Wistar chose to hang on to roughly three quarters of the remaining value of the Rotateq® royalty stream. And because Wistar retained the rights to all Merck Rotateq® revenue above $300 million in a given year, Offit gets a share of that too.
Although Melnicoff, Wistar’s Director of Business Development, declined to provide details of the arrangement with Offit, she said, “To my knowledge Wistar has had policies in place, I don’t know exactly when but probably from the early ‘80s if not before, relating to obligating our scientists to assign any inventions that they make in the course of their work at Wistar to the Institute.” She said “our policy is on our website on inventor sharing", a policy that places the inventors’ share at 15%, which was split equally among the three inventors, according to Offit.
Staci Vernick Goldberg, Wistar’s Director of Communications, gave us this statement: “A collaborative scientific research project which began in the 1980s between the Wistar Institute and the Children’s Hospital of Philadelphia, and later Merck, led in 2006 to FDA approval of a vaccine that effectively prevents rotavirus infection. In order to develop the science and bring this lifesaving vaccine to the public, where today it is part of the recommended vaccine schedule for all U.S. babies, the parties entered into a technology licensing agreement. The Wistar Institute is bound to non-disclosure based on confidentiality provisions within this licensing agreement. We respectfully decline to comment for your story."
Since its launch, Rotateq® has consistently been generating a good deal more revenue than $300 million per year, delivering Offit an ongoing interest in global success of the rotavirus vaccine category and raising an obvious question: How much is this ongoing royalty stream worth to him?
Calculating Offit’s income based on direct royalty payments by Merck: past and future
1) Direct royalties to the Wistar Institute. In most cases, the arithmetic of pharmaceutical patent licensing is straightforward: patent owners receive a fixed percentage of product revenues from their licensees. Most such licensing deals involve single digit percentages, i.e., between 1 and 10%, but these rates can be quite variable. In the case of a jointly owned patent, the owners would each receive half of the overall royalty percentage on the patent. The best way to ascertain the royalty rate is to obtain the information from the licensor directly. We contacted Wistar to comment on their royalty rate and they declined to disclose it, citing non-disclosure agreements, so we are forced into a further exercise in financial forensics.
Fortunately, there are numerous sources that can inform an estimate of these Rotateq® royalty flows. The most helpful of these is the Paul Capital deal with Wistar, which requires only one assumption (Paul Capital’s discount rate for the time value of money) to permit calculation of a relatively precise estimate.
To illustrate, in order for Paul Capital to be willing to pay $45 million for a 13 year royalty stream between 2006 and 2019, we calculate that Wistar’s royalties on the first $300 million in Rotateq® revenues would need to fall somewhere between $6-9 million per year, depending on the discount rate Paul Capital applied to the future royalties (for the financially minded among you, just calculate the required annual cash flow to generate $45 million worth of “net present value” on a 13 year royalty stream with a discount/interest rate in the 10-15% range). This calculation would mean that Wistar has a royalty rate somewhere in the 2-3% range. For simplicity’s sake, we have assumed that Wistar’s actual royalty is 2.5%, which after adding an equal amount for the CHOP license brings Merck’s total royalty for its Rotateq® patent license to 5%.
How can we verify that this estimated royalty rate is accurate? Well there are some simple tests one can apply. First of all, we know precisely what Merck’s Rotateq® revenues are, since Merck reports quarterly revenues for all of its biggest selling drugs and vaccines, including Rotateq®. We’ve provided a full accounting of these revenues in Table 1 below.
|Table 1: Merck's Rotateq® Revenue: 2006-2009|
|Year||Fiscal Quarter||Merck's quarterly revenue from Rotateq® ($M)||Merck's annual revenue from Rotateq® ($M)||Merck's Annual Rotateq® revenue above $300M ($M)|
(if Q4 revenues >$120M)
Second, we can also look to the Wistar Institute’s Annual Reports, in which their annual income from royalties (also known as “technology transfer”) is provided. Although Wistar doesn’t itemize their Rotateq® royalties, their recent annual reports give great prominence to the vaccine’s development. In order to check the reasonableness of our royalty rate estimate, we took Merck’s annual revenue over $300 million, multiplied by 2.5% and compared the resulting number with the changes in Wistar’s technology transfer income. As the table below shows, using the information about the Paul Capital transaction along with a 2.5% royalty rate for Wistar’s Rotateq revenue quite closely accounts for the increases in Wistar’s technology transfer revenue from 2004 to 2008.
|Table 2: The Role of Rotateq® in the Growth of the Wistar Institute's Licensing Income|
|Year||Wistar Institute's "Technology Transfer" revenues ($000)||Rotateq Revenues ($000, est)||Likely impact of Rotateq® royalties on the Wistar Institute's technology transfer revenue|
|0||Zero. Wistar's pre-Rotateq® revenues provide a rough estimate of their technology transfer income from other sources|
|2005||$2,985||1,000||Wistar's income increased by $1.16 million in 2005
Wistar received a $1million Rotateq® payment in December 2005.1
(less investor payments)
|Rotateq® was first marketed in the US in 2006.
Wistar received a $44 million payment in Q2 2006.1
Wistar's 2006 Annual Report: "Principally composed of revenue from a one-time sale of a portion of the future royalty income expected from commercialization of the rotavirus vaccine."2
|2007||$8,033||5,600||Merck's 2007 Rotateq® revenues were $665 million
2.5% of the revenue over $300 million equals $8.4 million
|1. According to the December 15, 2005 press release, "Under the terms of the agreement with the Paul Royalty Fund, Wistar will receive an up-front payment of $1 million and a second payment of up to $44 million when ROTATEQ is marketed in the United States."
2. As with CHOP, the gap between the $44 million payment and the $38 million revenue item may represent inventor payments.
Although we’re largely focused here on Offit’s income, it’s worth noting how valuable the Rotateq® licensing revenues have been to Wistar. In 2003, licensing represented only 3% of total revenues of Wistar’s revenue of $43 million, most of which came from federal grants. By the time Rotateq® hit its first full year of sales, technology transfer income had risen to 15% of annual income and Wistar’s President took pains to sing the praises of the larger benefits to society of technology transfer in Wistar’s 2007 Annual Report. “Through my work with the CEO Council for Growth”, said Russel Kaufman, “I have come to appreciate the critical role of technology transfer – the process of moving a discovery from a laboratory into commercial development – in growing the economy.” In 2008, rising technology transfer income became even more important to Wistar, reaching 22% of revenues while also providing a lifeline in a difficult financial year; Wistar reported a staggering $25 million in investment losses in 2008.
As we noted above, Wired Magazine reported that Offit “continues to collect a royalty each year” from sales of Rotateq®. This ongoing payment stream can only come from Wistar and we have estimated Offit’s share of these payments based on three inputs: Merck’s revenue in excess of $300 million (see Table 1), Wistar’s royalty rate on those revenues (see Table 2) and the Wistar inventor distribution (we have assumed the current published rate of 15%). If we apply a Wistar royalty rate of 2.5% to the Rotateq® revenue, apply the inventor share of 15% and divide that share by three to get Offit’s personal share, we estimate that Offit receives an eighth of a cent (or .125%) for every dollar of Merck’s Rotateq® revenue above $300 million. If Rotateq® performs well, it can generate a large annual income for Offit: a relationship we have illustrated graphically in Figure 1 (click to enlarge.)
We can apply this formula to Merck’s actual Rotateq® revenues to obtain a precise estimate of Offit’s past royalties from Wistar. But how can we predict where on this payment line Offit’s future royalties will fall? Any prediction, of course, is subjective and necessarily speculative so we have not attempted to make a single estimate ourselves. Instead, we have considered several different approaches, each using a different external source, to provide a range of possible income forecasts.
First, we know that Wall Street analysts are in the business of making such predictions and such estimates were likely available to the parties involved in the negotiations on the securitization of royalties based on these revenues. Supporting this notion is a comment from Wistar’s Director of Business Development, Meryle J. Melnicoff, who stated in a May 2006 presentation that “Wall Street estimates peak revenue at $1 billion annually.” Using that level of sales, Offit’s continuing annual royalty would come to $875,000 over the nine years from 2010-2018.
Second, we can draw a simple inference based on a comparison of the Royalty Pharma payment to the Paul Capital payment. After February 2006, when Rotateq® was first marketed in the U.S., the royalty stream on the first $300 million of revenues was worth $45 million to Paul Capital. In April 2008, Royalty Pharma acquired CHOP’s royalties after October 1, 2007, a year and a half later, for $182 million. In other words, Royalty Pharma acquired the full royalty stream for almost exactly four times what Paul Capital paid for a $300 million portion. (It’s worth noting that Paul Capital received its smaller portion of royalties over the full period of patent protection; by contrast, CHOP paid for royalties “from and after October 1, 2007” and Merck reported Rotateq revenue for six quarters prior to that date, none of which appear to have been included for royalty purposes in the CHOP deal). If Paul Capital’s royalty stream transaction was based on only $300 million in annual revenue (and the least risky portion), then in April 2008, Royalty Pharma appears to have estimated an annual revenue stream of at least four times $300 million, or more than $1.2 billion. That level of sales would place Offit’s continuing annual royalty income at well over $1 million from 2010-2018.
Third, we can look to comparable vaccine products in the market today. The most successful of these is Wyeth’s pneumococcal vaccine, Prevnar®. In 2008, Prevnar®’s domestic revenue was $1.2 billion, similar in magnitude to the forecasts we’ve seen for Rotateq®. But international markets have been a huge source of sales for Prevnar® (well over half the total), reaching $1.5 billion in 2008 and giving Wyeth worldwide revenues of $2.7 billion. Prevnar®’s sales through the second quarter of 2009 have shown continued growth over the prior year, putting Prevnar® in position to break the $3 billion sales barrier by year end. We have therefore used Prevnar®’s worldwide sales performance as the most optimistic benchmark to set an upper limit for Rotateq®’s future revenue of $2.5 billion.
Based on these inputs, we are now in a position to calculate the distributions that Offit would receive based both on Merck’s past Rotateq® revenues and on predicted future sales of Rotateq®.
1. For the period from 2006 through 2009, Offit “continues to collect a royalty each year”, almost certainly based on Wistar’s income from Merck’s annual Rotateq® revenues in excess of $300 million. Using a conservative estimate for the final quarter of Rotateq® revenues (which have not yet been reported), the Merck revenues that would be subject to the Wistar royalty would equal at least $795 million (see Table 1). Assigning an inventor share for these revenues to Offit of .125%, this would mean Offit has earned approximately $1 million so far based on Merck’s license payments to Wistar.
2. For the period from 2010 to 2019 (Rotateq®’s patent protection expires on February 19, 2019), we assume that Offit will continue to receive royalties of .125% on the same qualifying revenues. If Rotateq® meets its annual revenue expectations of $1.2 billion during that period, Offit’s payments would come to $1.125 million per year for 9.1 years, or $10.3 million in total. By contrast, in the most pessimistic scenario, if Rotateq®’s annual revenue during this entire period is only $600 million, Offit’s share would be worth less: $375,000 per year, or $3.4 million. In the most optimistic case, if Rotateq succeeds in reaching Prevnar’s worldwide sales levels of over $2.5 billion, Offit could receive as much as $2.75 million per year and $25.1 million through 2019.
Offit has acknowledged receiving a continuing royalty, but not the extent of his contingent future payments.
2) Direct royalties to CHOP. Although the large majority of CHOP’s benefits from Rotateq® royalties were realized in a single lump sum deal with Royalty Pharma, there was a substantial sum roylaties paid to CHF prior to the securitization deal with Royalty Pharma that began in October 31, 2007. Confirming the effect of these payments, we can observe that before selling its rights to Royalty Pharma, CHF’s royalty income grew rapidly after Rotateq® was marketed in the U.S (see Table 3). Like Wistar, these royalty payments were reported in annual report documents from the Children’s Hospital Foundation (CHF), allowing us to make a direct comparison between the increased licensing revenues received by CHF and our estimates of the Rotateq® royalty payments that CHF received from Merck before selling its ongoing royalty stream to Royalty Pharma.
Applying a 2.5% royalty rate to Merck’s reported Rotateq revenue, we find that we can account for 74% of the increases in CHF licensing income during 2007-8 (using the same approach, as shown in Table 2, we accounted for 92% of Wistar’s increased royalty income in 2007-8). Although it’s possible that other Wistar licensing programs increased at the same time, the clear temporal alignment of the licensing surge in both institutions, the prominence of Rotateq® in both series of annual reports and the close match between our calculated revenues (using a 2.5% royalty rate) and reported revenues suggest that our royalty estimates for Rotateq® are reliable.
|Table 3: The Role of Rotateq® in the Growth of CHF's Licensing Income|
|Fiscal Year (June 30 fiscal year end)||Children's Hospital Foundation's licensing revenues ($000)||Rotateq® royalties
|Likely impact of Rotateq® on CHF's licensing income|
|Before Rotateq®, CHF's licensing revenues were small|
|13,4251||After Rotateq® was marketed in the U.S., CHF's licensing revenues grew rapidly3 before they sold their Merck royalty payments to Royalty Pharma|
|1. Estimate based on Merck's Rotateq® revenues fo $537 million through October 31, 2007 and a licensing rate of 2.5%
2. This was the reported income excluding the "Rotateq monetization." Total licensing income in FY 2008, including the Royalty Pharma deal was $190.8 million. This report provides yet another estimate of CHF receipts from the securitization deal: $177.8 million in cash receipts reported by Moody's.
3.CHF's licensing income for FY 2007-8 increased by $18.2 million over its 2006 annual revenue rate of $1.19 million
Based on our analysis of Wistar’s royalty payments, we are also now able to estimate an additional direct payment from CHOP that Offit likely received. Since the Royalty Pharma deal transferred CHOP’s rights to Rotateq® royalties “from and after October 1, 2007”, any CHOP royalties received before that date would have resulted in an additional payment to Offit.
How do we make this additional estimate? Applying CHOP’s 2.5% royalty to the CHOP inventor share at the time of 10% and dividing that share by three to obtain Offit’s portion, we estimate that Offit received .083% of all Merck Rotateq® revenue before October 1, 2007. For the period from 2006 through the third quarter of 2007, we can add up the six quarters of Rotateq® revenues that should have been subject to the CHOP royalty to obtain a total of $537 million (see Table 1). Based on these two assumptions, we therefore estimate that Offit received $447,000 (.083% x $537 million) in additional CHOP royalty distribution payments before the deal was closed with Royalty Pharma. We asked CHOP to confirm our assumptions and they declined comment.
We are not aware that Offit has disclosed receipt of any such payment, nearly a half million dollars, previously.
The issue of Offit’s ongoing incentives with respect to Rotateq® income
As one can observe in Figure 1, the ongoing financial benefits Offit receives vary quite widely with Merck’s annual sales performance. As we’ve reported above, when Rotateq® was first introduced and the large securitization deals subsequently struck with Paul Capital and Royalty Pharma, the revenue outlook appeared to be quite bullish. In a panel convened in May 2006, Wistar’s director of business development reported that “Wall Street estimates peak sales at $1 B annually”; our own estimates suggest that the parties to the securitization deals placed an even higher forecast on those annual revenues, $1.2 billion or higher. As we’ve shown, a more optimistic forecast based on strong international adoption of Merck’s vaccine could result in annual revenues as high as $2.5 billion or more.
Unfortunately for Offit, Merck’s Rotateq ®revenues have not yet matched those lofty expectations. There are two possible explanations for this. The first is market share losses in the domestic market. After Rotateq®’s approval in 2006, Merck had the U.S. market all to itself for a while, as Wyeth’s Rotashield® had been withdrawn a few years previously. For nearly two years, Rotateq® had an effective monopoly on the American rotavirus vaccine market that Offit had voted to create. But starting in April 2008, Merck faced a new competitor for the US market, when the FDA approved GlaxoSmithKline’s Rotarix® for sale in the U.S. market. This has had the effect of reducing Rotateq®’s domestic market share and sales.
The second reason is that international markets have been slow to develop. Merck has pushed hard to market Rotateq® outside the US. For example, Merck announced “access partnerships” for Rotateq® in developing markets like Nicaragua and is pushing the WHO to expand its recommendations worldwide. Supported by CDC and NIH, their push has been intensifying. Still, the international market for Rotateq® continues to be modest.
As a consequence of these two factors, overall 2009 revenues for Rotateq® are down, driven by U.S. revenue declines of over 25%. Merck’s foreign sales, although growing, remain only a fraction of domestic revenue, less than 11% of total revenue through September 2009.
Adding it all up
As should be clear by now, obtaining a full and accurate picture of Offit’s financial benefits from Rotateq® is quite complex, driven by contrasting practices in separate institutions using different payment methods, each of which involve a range of financial parameters that determine how cash payments flow to Offit. As we have assimilated new information, we have learned that our earlier estimates underestimated this complexity.
Cutting through this complexity, we conclude our analysis by summarizing the payment flows. Although the Wistar and CHOP deals are markedly different, both provide two basic kinds of payments to Offit: either lump sums from securitized payments or ongoing royalties. In the case of ongoing royalties, analyzing past product revenues provides greater certainty than estimating future income based on projected revenues. In addition, there may well be other nuances in the terms of these inventor distributions that we have not identified. Our most important unconfirmed assumptions include the following: a 5% patent license rate paid by Merck, an equal split of that royalty between patent owners that provides 2.5% each for Wistar and CHOP, and a 15% distribution share for Wistar inventors.
The results of our analysis are summarized in Table 4 below. Based on our exercise in financial forensics, we now estimate that Offit has already earned over $10 million from his relationship with Merck and its Rotateq® vaccine. In terms of ongoing royalties, we estimate that he stands to make at least $300,000 per year of annual income, a ten-year flow of payments that would place him solidly in the top 1 percent of American income earners for a decade, and as much as $2.75 million per year.
Furthermore, to the extent that Offit has attempted to create the perception that he only made $6 million from Rotateq®, our analysis shows that he has selectively withheld information on important additional payments. Our calculations show that he has likely received $8.4 million in lump sum payments so far and earned approximately $10 million in total income based on Rotateq® sales through this year, after including ongoing royalty payments he has earned based on Rotateq® revenues through year end 2009.
Put differently, through year end 2009 Offit will have received less than half of his potential return on Rotateq®, and therefore his financial future is clearly tied into the success both of his specific rotavirus vaccine and the reputation of vaccines more broadly, especially worldwide. The increase in royalty payments above $300 million on which Wistar’s royalty payments so strongly depend will be realized most effectively if rotavirus vaccine uptake proceeds expeditiously in international markets.
Finally, although we do not question the sincerity of Offit’s strongly held beliefs on the benefits of all vaccines, we note that his vaccine (not to mention his autism) advocacy is closely tied to his personal financial interests. As foreign governments and health authorities are persuaded to adopt the American policy of intensive infant vaccination, Offit’s personal wealth will increase.
|Table 4: Total Payments to Offit from Rotateq over the Life of His Patents|
|2010-2019, or 9.14 years (annual revenue scenario)
($2,750,000 per year)
($1,125,000 per year)
($375,000 per year)
|Note: Lump sum payments in bold red font|
Dan Olmsted is Editor of Age of Autism and Mark Blaxill is Editor at Large.